Economics Journal: Who’s to Blame for India’s Illicit Liquor?

An activist held a banner during a silent march in memory of victims who consumed bootleg liquor in Kolkata, Dec. 17.

Who is responsible for the recent tragic deaths of at least 170 people in West Bengal? The victims had consumed illicitly distilled “country liquor”, the Indian vernacular for indigenous spirits distinct from “Indian-Made Foreign Liquor,” the Indian term for domestic variants of drinks like whisky and gin, as distinct again from imported spirits. As commonly occurs, this supply was contaminated with methyl alcohol, which can cause blindness, or even death.

Superficially, it’s easy to blame the victims who drank the illicit hooch. Indeed, Congress MP Milind Deora did as much when he tweeted : “Sad that Indians are still killed by spurious liquor. Such an avoidable tragedy in WB. Here, flogging might have saved over 130 lives?” Even if he was being facetious, and riffing off Anna Hazare’s preferred method of punishment in dealing with people who flout his village’s teetotal philosophy, the young and otherwise savvy Mr. Deora’s remark suggests how widespread the notion is that it’s the stupidity of uneducated poor people that induces them to consume unsafe liquor.

However, if we probe more deeply, the list of suspects widens. Why after all would someone ingest a potentially harmful substance?

Far more plausible than the thesis of the stupid poor person who doesn’t know any better and needs to be flogged into submission, is the economic reasoning that lies behind such a choice. Like most of us who aren’t teetotalers, a poor person wants to enjoy a drink or two after a hard day’s work, exactly as in the case of those who died in West Bengal. Unfortunately, legal liquor is priced way beyond the means of the poorest in India. Typical moonshine costs about 10 rupees, roughly $0.20, for a half liter, whereas even legitimate country liquor would cost 50 rupees, and Indian made foreign liquor much more.

Given that the cheap and potentially hazardous liquor is all he or she can afford, the poor person takes a calculated risk that the pleasure gained from drinking will outweigh the small but real probability of getting sick or dying. Conceptually this is no different from the smoker who weighs the enjoyment from a cigarette against the risk of increasing his or her chances of getting cancer or lung disease. As Nobel economist Gary Becker has argued, there’s nothing intrinsically irrational, whether rich or poor, about things like drinking or smoking which carry harmful consequences.

The crux of the matter is that legal and safe liquor is unaffordable. Why is that?

It’s partly because in India, as in almost every other country, the production and sale of alcohol (and for that matter tobacco) is heavily regulated and highly taxed. Basic economics tells us why excise taxes on liquor and cigarettes are invariably so high, often 50% or more of the purchase price. It’s simple: the demand for such products is “inelastic”, or not very sensitive to price. A drinker needs his drink and a smoker needs his fix, pretty much regardless of the price.

Despite the usual paternalistic rhetoric that justifies high “sin taxes” on health grounds, the true economic justification is that they’re cash cows for governments.

West Bengal in particular has steeply raised value-added and excise taxes on both country and Indian-Made Foreign Liquor. For instance a 180 ml bottle, which is basically one shot of liquor, went from 55 rupees before the tax increase to 80 rupees, of which a whopping 60 rupees, or 75%, goes to the government as tax. Not surprisingly, sales of legal liquor have dropped off as poorer consumers have been forced to substitute with cheaper illicit liquor. Even at 55 rupees it was unaffordable for many, and at 80 rupees, or almost a day’s wages, it would be totally out of reach for the poor.

While most jurisdictions in the world heavily regulate and tax liquor, and some countries such as Canada and Sweden even socialize liquor retail, there’s an additional element to the story in India.

Unlike most other countries, in India domestically produced liquor is distilled into ethanol from sugar molasses, an otherwise worthless residue of sugar production. This market is tightly regulated by the government and thanks to the influence of the powerful sugar lobby, the price of ethanol is fixed at the artificially high price of 27 rupees per liter, which may even rise further soon if the industry gets its way. The fact is there isn’t a free market for sugar, ethanol, or related products in India. This means that even if it were lightly taxed or even not taxed at all, the artificially high price and therefore restricted supply of ethanol would translate into high and unaffordable prices of domestically produced liquor.

Some economic common sense suggests why legal liquor should be much cheaper than it is. A large distilling operation of the type used by country liquor or domestically produced foreign liquor manufacturers should enjoy considerable economies of scale over illicit country liquor, which is typically distilled in small batches, due both to space constraints and the need to avoid detection by the authorities.

The logic of economies of scale suggests that a lightly regulated and lightly taxed legal liquor industry, with market-determined prices for ethanol, would be able to produce competitively priced affordable liquor that would make the illicit liquor business redundant. Alas, the outsized influence of the sugar lobby, coupled with the government’s need to raise revenue through excise taxes, will mean that legal liquor will remain out of the reach of the poor for a long time to come. As with many bad regulations in India, it’s the poor who bear the brunt.

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